What are the risks of index funds?
The return of 1. index funds depends on the performance of the tracked index. If the market falls as a whole, then index funds will also fall, and investors will face the risk of loss.
2. Although the index fund aims at tracking an index, it is actually difficult to completely copy the index for various reasons. Therefore, there will be some differences between the actual return of index fund and the return of index, which is the tracking error. The greater the tracking error, the more the index fund deviates from its essential goal, and investors may miss some opportunities or take some unnecessary risks.
3. Index funds are divided into open and closed types. Open-end index funds are more free to purchase and redeem, and have better liquidity. However, closed-end index funds can only be purchased during the issuance period and redeemed at one time after the expiration, which has poor liquidity. If investors choose closed-end index funds, they may not be able to adjust their positions or stop losses in time when the market fluctuates.
How to avoid it?
1. Investors should choose appropriate index funds according to their risk preference and investment period. Generally speaking, broad-based index funds are less volatile and suitable for medium and long-term holding, while narrow-based index funds are more volatile and more suitable for short-term trading. In addition, investors can reduce the risk of a specific market by diversifying their investments in different types of index funds, such as stock index funds, bond index funds and commodity index funds.
2. Choosing an index fund with small tracking error can better reflect the performance of the index and improve the rate of return. Investors can also pay attention to the characteristics of the index itself, such as the number of targets and the frequency of replacement, and choose those index funds with relatively stable performance.